U.S. Oil Producers Cut Rigs as Price Declines

Oil pump jacks at work at a drilling site in North Dakota. Producers have been cutting back. Credit
Eric Gay/Associated Press

HOUSTON — With oil prices plunging at an ever-quickening rate, producers are beginning to slash the number of drilling rigs around the country.

The national rig count had remained surprisingly resilient over recent months even as oil prices dropped by more than 50 percent since June, and it still tops the count of a year ago as domestic production continues to surge.

But an announcement on Wednesday by Helmerich & Payne, the giant contract rig company, that it planned to idle up to 50 rigs over the next month sent shudders through the industry. And that came on top of 11 rigs that it has already mothballed, meaning that in just a few weeks, its shale drilling activity will be reduced by about 20 percent.

“Low oil prices are increasingly impacting the U.S. land drilling market,” the company said in a presentation to a Goldman Sachs energy conference.

The announcement was an early indication that the oil industry, with its history of booms and busts, was in the early stages of its latest downturn. Energy companies drop rigs when drilling costs outpace the price they think they will attract, leading to lower production and higher prices. But until the effects ripple through the market, consumers and the broader economy will most likely enjoy the benefits of low gasoline and heating oil prices for at least the next six months, energy experts say.

As for the industry, the signs of retraction are clear. The nation’s rig count, a barometer of oil exploration and production activity, fell by 26 in the week that ended Jan. 2, following a drop of 16 the week before, according to the Baker Hughes service company.

The cuts could eventually be felt in areas where the local economy depends on oil. Each rig represents about 100 jobs, from roughneck field hands to maintenance workers, and the current rig count is down 85, or 5 percent, from a recent peak in late 2014.

“Demand for rigs is falling off the cliff,” said Joseph Triepke, a financial analyst and managing director of Oilpro, an industry publishing company. “Exploration and production budgets are down anywhere from 30 to 40 percent and the cuts are happening faster than we thought.”

Mr. Triepke predicted that over the next six months, the big three land drilling companies — Helmerich & Payne, Nabors Industries and Patterson-UTI Energy — are “likely to cut approximately 15,000 jobs out of the 50,000 people they currently employ.”

Already, day rates that oil companies are willing to pay for rigs have dropped 10 percent, Helmerich & Payne said. That is a sign, analysts said, that producers are trying to squeeze costs before they cut revenue-producing output required to pay dividends and the interest on their debts.

Even with the reductions, though, large-scale layoffs across the industry are not expected, at least not immediately. Producers contract their rigs for as long as three to four years, and many companies have hedges that lock in higher prices than the going market rates. In addition, producers often need to drill simply to retain their leases or keep their revenue up.

Nationwide, the oil industry employs about a million people, including extraction, pipeline construction and refining, and the boom has added about 150,000 industry jobs over the last three years, according to Citi Research.

Industry executives say companies are reluctant to let highly skilled workers go, especially when oil prices are likely to rebound in the next couple of years as global energy demand rises. But rig and fracking crews will inevitably be let go first, they said, since those workers can easily be rehired or replaced when drilling rebounds.

Domestic oil production has increased by more than a million barrels a day in each of the last three years. But executives say they believe production may begin to slow near the end of the year as the drilling of new wells declines.

On Wednesday, the global Brent benchmark dropped below $50 a barrel for the first time since May 2009, before settling around $51. The American benchmark rose slightly, to around $48.

Photo

An oil drilling pump site in North Dakota. Because of a pipeline shortage, Bakken shale producers are selling crude for about $34 a barrel.Credit
Shannon Stapleton/Reuters

But producers in some American fields are receiving far less than that. Because of a shortage of pipelines and the distance to major markets, North Dakota’s Bakken shale producers this month so far are selling their crude for as little as $34 a barrel.

That is why oil executives say the state that rapidly emerged as the nation’s second-biggest producer after Texas could suffer the biggest reversal in investment and output in the coming months.

“Drilling in North Dakota is very expensive and the costs are extremely high,” noted Chris Faulkner, chief executive of Breitling Energy, an oil and gas explorer that left North Dakota a year ago to concentrate operations on South Texas. “If you are not in the middle of the sweet spot in the Bakken there is no way you are now going to risk 10 or 11 million dollars on a well.”

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Already companies are dropping rigs in nearby Canadian fields at a far faster rate than in the United States.

There are signs almost every day that the industry is slowly reversing its breakneck drilling spree of the last six years, as exploration and production in new shale fields nearly doubled domestic production. This week, Concho Resources, a major producer in the Permian basin of West Texas, announced its 2015 exploration and production budget would be cut by a third, to $2 billion.

“In the current environment, we intend to prudently manage our 2015 capital program around anticipated cash flows,” said Tim Leach, Concho’s chief executive, “and retain significant flexibility to scale our activity up or down depending on service costs and commodity prices.” Even with the cuts, Concho projects producing more oil in 2015 than last year, as do many other companies, potentially putting further pressure on oil prices.

Another big Texas producer, Pioneer Natural Resources, moved on Wednesday to protect itself from the declining market by converting most of its derivative contracts to a fixed-price swap that guaranteed prices for payment.

The company will receive just over $71 a barrel for 82,000 barrels a day of production. That floor price reflects the industry view that the crude price will rebound, though it may not approach the $100-a-barrel levels of last summer for the next year or two.

“Restaurants are still full and the traffic is still heavy around Midland,” said Dexter Allred, general manager of Rusty’s Oilfield Service Company, which serves the Permian Basin, referring to the West Texas oil capital. “But six months from now may be another story.”

A version of this article appears in print on January 8, 2015, on Page B1 of the New York edition with the headline: U.S. Oil Producers Cut Rigs as Price Declines. Order Reprints|Today's Paper|Subscribe